Corporate Buybacks affect the stockmarket

Corporate buybacks have made themselves seen throughout the stock market recently. These buybacks have become nearly essential to the stock market. The last decade’s overall large gains have been heavily influenced by corporate buybacks.

Ed Clissold Analyzes buyback purchases over the last nine years

In an attempt to understand this information Ed Clissold, a Ned David Research strategist, began looking into the time period when S&P 500 SPX, +1.22%, and Dow Jones Industrial Average DJIA, +1.20% were rising in popularity. In his analyzation of this time period, he found that there was a significant effect in share repurchases over the last nine years.

In order to look further into this data, Ed Clissold pinpointed four possible scenarios relating to the S&P 500 total return index SPXT, +1.20% and their possible performance against these scenarios.

According to Market Watch, these four scenarios were looked into;

  • buybacks disappeared;
  • buyback funds were held as cash;
  • buyback funds were used to pay dividends or
  • if they were used to reinvest in the company’s business.

The shift from Dividends to Buybacks

According to Ed Clissold, “Buybacks have become a substitute for dividends for two primary reasons, First, they are not double-taxed like dividends. Second, whereas investors view a dividend cut as a sign the underlying business is in trouble, buyback programs are suspended with few consequences.”

Many strategists agree with Ed’s study and conclusion. Dividends are notoriously known for their low return to shareholders, because of this buybacks are becoming more and more popular within the stock market world.

What happens when businesses reinvest buybacks into their own selves?

The S&P 500 is studied once more to dive into businesses reinvesting buybacks into their own companies. Clissold analyzed the data to see if reinvesting buyback funds made a difference “for expansion, productivity gains, or higher wages as a way to retain talent and motivate employees.”

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